Manufacturing activity marginally recovers

Event

The official manufacturing Purchasing Managers' Index (PMI) for January rose to 49.5, from 49.4 in December, according to data released by the National Bureau of Statistics (NBS) and the China Federation of Logistics and Purchasing on January 31st. A reading below 50 indicates a contraction in activity.

Analysis

The improvement in activity was marginal, with the January readings posting the first back-to-back contraction since January‑February 2016. The reading's sub-indices suggest that the policies introduced in January have done little to offset a broader economic slowdown, although these efforts are unlikely to feed into the data until later this year.

The readings, although seasonally adjusted, may still be slightly distorted by the run-up to the Chinese New Year holiday period as manufacturers suspend activity in advance of the holiday. Regardless, the employment sub-index sank to 47.8, the weakest level since February 2016, although this could have been owing to the usual extended period of factory closures. The new orders gauge slipped to 49.6, from 49.7, while the import sub-index similarly remained in contractionary territory, indicating that the softening in domestic demand remains the main drag on activity. External demand remains weak, however: new export orders posted their eighth consecutive month of contraction, although this was at a narrower rate than the previous month.

There were positive signals from other sub-indices: raw material stocks, although still in contraction, rose to the highest level since August, while finished goods inventories fell, suggesting that some replenishing of inventories could be underway. The official non-manufacturing PMI rose to 54.7, from 53.8 in December, representing a four-month high, hinting that services sector activity may still be providing some cushioning to the economy amid the manufacturing downturn. Although more policy support suggests that the January data may indicate a bottoming out in weak manufacturing activity, the expected resumption in US-China trade hostilities—as well as ongoing pressure in the global consumer electronics industry—indicates that headwinds will persist into the first half of 2019.

Impact on the forecast

The data are in line with our forecast that real GDP will soften to 6.3% in 2019.